Are Vacation Rentals Profitable in 2023?

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In 2004, there were just 14 properties listed on VRBO.com. Now, the site has approximately 2 million listings, and that’s just one of the many vacation rental sites out there. This statistic alone speaks volumes about the profitability of the vacation rental market. However, with the recent housing market change, you may ask yourself, “Are vacation rentals profitable in 2023?”

The increased interest in vacation rentals has affected market cycles and investments in single-family residential homes (SFRs). And, as it turns out, vacation rentals (VRs) can offer exceptional returns over SFRs if you know what you’re doing. Let’s explore what you need to know if you want to get into the vacation rental investment plan so you can make your vacation rental profitable in 2023.

Benefits of Investing in Vacation Rentals

While investing in a vacation rental property isn’t for everyone, it does have a lot of benefits for the right investor. This type of property has the potential for high returns. Although you may have bouts of low or no occupancy in your vacation rental, the substantial nightly rates for staying in these homes can make them profitable. There are also several tax benefits for short-term rental properties that you may enjoy as long as the property is rented for a specified number of days.

Another benefit to being a vacation rental investor is the flexibility you’ll have to use the property yourself. With a long-term rental, the property is more likely to be occupied by renters, and when it’s not, you’re probably cleaning and renovating it to get it ready for new tenants, so it’s unlikely you’ll have a chance to use the home. But with a vacation rental, you have more opportunity to stay in the house if you need or want to. With recession fears looming, you can rest easy knowing that vacation rentals are somewhat recession resilient. Travelers are often looking for ways to travel more affordably, and a vacation rental can offer just that.

Where to Find Vacation Rentals for Investing

One of the key considerations in the vacation rental industry is where to find vacation rentals for investing. If you don’t purchase the property in the right area, it could mean that you’re paying expenses when occupancy levels are low, which means you’re losing money. So you want to keep a few things in mind when you’re searching for the right vacation rental investment. Finding a destination city or popular vacation spot is a good start, but you also need to consider the location’s seasonality.

Ask yourself the following questions:

• Will the season affect visitation to the area?
• Are there any weather conditions that might limit people from coming to the area, such as heavy snow, hurricane, or tornado?
• Does the nearest city have a big draw for tourists, like a theme park, national park, or museum?
• Is there anything that will make the property stand out from others in the area?
• Can people easily get to the property from major interstates and highways?
• Does the area already have some vacation rentals?

Although people might need to use a vacation rental if they’re traveling for work or to visit family, most people use them as an alternative to staying in a hotel room when they’re on vacation. So you need to think about where people want to go on vacation when searching for the right investment property and planning your vacation rental strategy.

Is Buying a Vacation Rental Property Profitable?

According to VRMA.org, in 2010, only one out of 10 travelers had used a peer-to-peer marketed accommodation, also known as a vacation rental. But by 2015, one in four had. This number has only increased, with Grand View Research estimating that the short-term VR market could reach $256.31 billion by 2030.

In fact, vacation rentals went from being almost exclusively beachfront properties to a nearly 50/50 mix of beachfront and urban properties. And this is a trend that continues. So, needless to say, this market is really taking a bite out of the hotel business. VRMB.com data also shows half of the people who have tried vacation rentals now prefer them to hotels, which means they’re more likely to continue using this type of accommodation when they travel.

Investors who hope to take advantage of this have choices similar to what they have enjoyed in the single family residential and small multifamily residential markets: direct investment, partnerships, and passive investments. With this potential for growth in the market and the number of people who seek out rentals from sites like Airbnb and VRBO, there’s no telling just how profitable a vacation rental business could be in the coming years.

How To Choose a Profitable Location for Your Vacation Rental Investment

Selecting the right location for your vacation rental investment must be part of your overall short-term rental strategy if you want the home to be profitable. When you know how to choose the right location, you’ll have more luck finding a home that will rent well on Airbnb or other sites that help you market your property. Here are some ways you can choose a profitable location for your rental home:

Find the right neighborhood

When you purchase a rental property for travelers, it has to be in the right neighborhood. This means the renters must feel safe bringing their family members there. The homes in the area need to be clean and presentable. It’s also important that the renters feel welcome, so choose an area that isn’t going to be hostile or annoyed that you’re renting the place short-term and frequently to lots of different people. Consider the parking arrangement, too, as renters will most likely drive themselves to the rental property.

Local regulations and taxes

If you buy a short-term rental property in an area that charges you high taxes or fees for various regulations, it won’t be as profitable. Ensure that you look into all the area’s regulations and taxes for vacation rental properties. This can prevent you from getting stuck paying unexpected expenses that make your property less profitable than if you bought it from another location.

Carry out a vacation rental property analysis

Knowing your cash-on-cash return is important, but you have to analyze the overall costs, expenses, and profits of your vacation rental investment before you make your move. Those who fail to come up with a detailed revenue management strategy won’t fully understand their true potential return.

Here’s an example to illustrate how vacation rentals can produce better returns:

• An SFR property might cost $250,000 to purchase and provide monthly rentals in the range of $900 to $1,200 per month.
• A VR property might cost as much as $325,000 but produce rents in the range of $250 to $400 per night.

Our operating model calls for investment properties to cover the entire cost of operation with four- to six nights occupied per month — and more occupancy obviously produces greater profits. Even for highly seasonal locations, which produce 13 to 15 nights’ occupancy on average, monthly revenue sits around $4,000 to $6,000 per month. So you can see that knowing the numbers can give you the insight you need to know how profitable the rental can be.

5 Best Places To Buy a Vacation Rental Property

Consider buying your next rental property in one of these up-and-coming locations:

Slidell, Louisiana

Close to New Orleans and Lake Pontchartrain, Slidell, Louisiana, is a great place to consider for vacation rental properties. This midsize city has a small-town feel while being close to all the excitement of New Orleans. Visitors can also gain easy access to the Gulf Coast in Mississippi as well as outdoor adventures like swamp tours. The average daily rate (ADR) for vacation properties in Slidell is $339, making this a profitable place for Airbnb rentals.

Gainesville, Florida

Despite not being directly on the coast, Gainesville, Florida, is the ideal destination for those who really want to get out and explore. It’s just a short drive to either the Atlantic Ocean or the Gulf Coast from this medium-sized city, and it has a lot going on itself. There are museums, restaurants, and shopping for vacationers to enjoy. It’s one of the cheaper places to buy property in Florida, and the ADR for short-term rentals is $180. This could net you a revenue of nearly $40,000 a year if you can keep your occupancy rate over about 60%.

Williamstown, Kentucky

Thanks to the Ark Encounter, a Christian-themed attraction, Williamstown, Kentucky, has put itself on the map as an investor’s haven when it comes to short-term vacation properties. Not only is the Ark Encounter a popular spot for tourists, but the countryside in Kentucky is beautiful, making it an interesting place for outdoor enthusiasts. The ADR for rentals here is about $190, and home prices aren’t going to set you back as much as they might in more densely populated areas.

South Lake Tahoe, California

Its laid-back beach vibe and mountain air make South Lake Tahoe, California, an exciting place to become a vacation rental owner. This smaller city has the benefit of being a destination throughout the year thanks to its ski slopes and clear blue lake. With an ADR of $470, this area could be quite profitable for an investor. Of course, home prices are pretty high here, so make sure that you’re getting the right property.

Kansas City, Missouri

Kansas City, Missouri, is mostly in Missouri, but some of the city does spill over into Kansas, which is always a good thing for a vacation rental. Most travelers want to see as much as possible when they’re on vacation, so they can check two states off their bucket lists here. There’s also a lot for visitors to do and see in Kansas City, making it a more popular destination than you’d believe. It features mid-range home prices and an ADR of around $200.

How to Maximize Return on Investment in Rental Properties

We’ve all heard the success stories about fix and flips and the incredible return on investment that can be had with these properties, but they’re also a lot of work. Let’s look at how to maximize the return on investment with vacation rental properties so you can make more money without having to put in as much effort:

Research your competitor’s prices

You can easily find out what other investors are charging nightly for their short-term rental properties. Use sites like Airbnb and VRBO to determine what the ADR is in the area where you want to buy property. This can help you find the areas that are the most profitable. Compare the rates to the numbers you’ve analyzed for your investment strategy and see if you’ll be profitable using similar rates. If not, you may want to seek another loan provider or find an area where you can charge more.

Introduce dynamic pricing to your revenue management strategy

A dynamic pricing strategy allows you to set your rates based on supply and demand. So you can adjust your ADR depending on how much need there is for your rental. For example, if the area was hosting a festival, and most other properties were already rented, you could charge more for your home because there would be more demand. When there’s little demand for your rental, you can lower your price to ensure you have occupancy no matter what.

This type of revenue management strategy can help you maximize your return on investment because you’ll be able to control how much you rent the property for and when you want to increase or lower your rates. Using this strategy could mean you’re keeping your occupancy rates high more often.

Create special offers and offer discounts

You can offer special deals if you know of times when you may have fewer guests. Giving people a discounted rate doesn’t take away from your profits if it means having paying guests instead of having no guests. With special offers, you can even promote your unit to past tenants whom you would want to stay in your home again because they left it clean and nice.

List your vacation home on the top vacation rental sites

By listing your home on the top vacation rental sites, like Airbnb, you’ll get exposure to the most potential guests. Millions of people use these sites over traditional travel agencies, so you definitely want to list your home through them (and use more than one). They can also offer you tips for taking pictures and writing a compelling description that accurately describes your place and makes it appealing.

Market your vacation rental property

Although listing your home on vacation rental sites is great, you still need to have a plan for marketing your home. Potential guests need to see pictures of the home when they view it on Airbnb and other sites, and you may need to advertise it more traditionally or through word of mouth. Social media influencers can also help you get the word out about your vacation rental, especially if it’s new. Having people give you rave reviews will also provide credibility to your rental home.

How to Furnish Your Rental Property to Maximize Return on Investment

There’s a lot to think about when you choose to go with a vacation rental investment property. To really maximize your return, you need to consider how you’ll furnish the property to get the most out of it long term. Consider these tips for furnishing your vacation rental:

Buy functional and durable furniture

It might be tempting to get the cheapest furniture you can from the local thrift store, but this isn’t always going to save you money in the long run. What you want to do is buy pieces that are both durable and functional. Putting furniture in the rental that will last a long time is the best way to go, as many people will be using it, and, unfortunately, they won’t treat it well. It should also be functional, meaning don’t waste your money buying a decorative lamp that no one will ever turn on.

Follow a checklist to cover all the basics

Think about what you use in your home daily, and make a checklist to ensure that you have these things in the home. People may not spend a lot of time in the rental if they’re out exploring during the day, but you want it to provide the basics so that they enjoy a comfortable stay. Consider how many people you’re providing beds for and also have seating for that many people.

Hire a professional designer

Hiring a professional designer could be worth the extra cost, as they’ll be able to help you make the home comfortable, stylish, and appealing to your guests. You don’t want the rental to feel like a thrown-together mix of whatever you could find to put in it, and a designer can make the vacation home feel purposeful. Use their skills, so you don’t have to waste your time or money on things the home doesn’t need to offer.

Add a local touch to interior design

People visit the area where your vacation home is located to experience what it offers. So add some elements to the decor that bring out the culture of the locals. If it’s near the beach, have some seashells in the bathroom. Vacation rentals near New Orleans should have decor with French writing or items in the colors of Mardi Gras. This subtle detail can make people feel like they’re in your home instead of just another room.

Equip your vacation rental with useful amenities

Part of the allure of staying in a vacation rental is that it has all the amenities one might need, so they don’t have to bring as much with them when one travels. So having a lot of useful stuff in the home is a good idea. If you can, try staying there for a night or two to discover what you might be missing. Did you remember to leave a can opener in the drawer with the spatula? Is there a corkscrew for opening a bottle of wine? The little touches will make people remember your place and want to come back or tell their friends about it.

What Are the Pros and Cons of Owning a Vacation Rental Property?

Owning a VR can be quite profitable, but it’s not for everyone. There are definitely pros and cons to getting into the short-term rental market. Take a look at a few of them to help you decide if this is the right investment strategy for you:

Vacation rental pros

One of the benefits of a vacation rental is the fact that you’ll have more opportunities to use the house yourself. Many people love that they can stay in a home they own because they don’t have to pay the daily fee.

With long-term renters, a lot can go wrong with an investment property, but you might not find out there are problems for years. A lot of long-term tenants don’t tell their landlords that something is broken right away, if ever. When you have short-term tenants, you can find out if something needs attention a lot sooner.

A vacation home, just like any other property, will appreciate over time. So you get the monthly income as well as the equity. There are also several tax benefits, such as depreciation write-offs and deductions you can take, especially if you don’t use the home much or it’s rented for only a certain number of days each month.

Vacation rental cons

Having a lot of people in and out of a rental property constantly can put a lot of wear and tear on it, so you may have to replace things sooner than you would in a long-term rental. You also have to furnish the rental property, an added startup expense. You may need to employ a laundry service to wash the sheets and towels in the home as well as other cleaning services, as the home has to be thoroughly cleaned after each stay.

The VR market can fluctuate more for some properties, and there’s no steady, reliable income. You just have to take the high periods with the low periods and calculate your return on investment accordingly. The boom in vacation rentals from a few years ago may be waning, and for those who got accustomed to that income, this could be a painful time for the pocketbook.

VRs are largely tied to tourism. So if the area where the rental takes a downturn, your income can too. The seasonality of the rental can also be difficult to deal with if you aren’t prepared for the slow times.

Making Vacation Rentals Profitable in 2023

To make your vacation rental profitable in 2023 and beyond, you must be prepared for market changes. Ensure you know the market conditions in the area you’re interested in purchasing a VR property. Talk to other short-term rental investors to find out what you need to know about the area. Don’t jump into a rental property without doing your research. You should also look into where people are traveling or want to travel and see what the rentals are like in that area. Because the housing supply is low, you may have to be ready to really hunt down the right property, but you should also be prepared to pounce when the right deal comes your way.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.